[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2006]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.860G-2]

[Page 115-122]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec.  1.860G-2  Other rules.

    (a) Obligations principally secured by an interest in real 
property--(1) Tests for determining whether an obligation is principally 
secured. For purposes of section 860G(a)(3)(A), an obligation is 
principally secured by an interest in real property only if it satisfies 
either the test set out in paragraph (a)(1)(i) or the test set out in 
paragraph (a)(1)(ii) of this section.
    (i) The 80-percent test. An obligation is principally secured by an 
interest in real property if the fair market value of the interest in 
real property securing the obligation--
    (A) Was at least equal to 80 percent of the adjusted issue price of 
the obligation at the time the obligation was originated (see paragraph 
(b)(1) of this section concerning the origination date for obligations 
that have been significantly modified); or
    (B) Is at least equal to 80 percent of the adjusted issue price of 
the obligation at the time the sponsor contributes the obligation to the 
REMIC.
    (ii) Alternative test. For purposes of section 860G(a)(3)(A), an 
obligation is principally secured by an interest in real property if 
substantially all of the proceeds of the obligation were used to acquire 
or to improve or protect an interest in real property that, at the 
origination date, is the only security for the obligation. For purposes 
of this test, loan guarantees made by the United States or any state (or 
any political subdivision, agency, or instrumentality of the United 
States or of any state), or other third party credit enhancement are not 
viewed as additional security for a loan. An obligation is not 
considered to be secured by property other than real property solely 
because the obligor is personally liable on the obligation.
    (2) Treatment of liens. For purposes of paragraph (a)(1)(i) of this 
section, the fair market value of the real property interest must be 
first reduced by the amount of any lien on the real property interest 
that is senior to the obligation being tested, and must be further 
reduced by a proportionate amount of any lien that is in parity with the 
obligation being tested.
    (3) Safe harbor--(i) Reasonable belief that an obligation is 
principally secured. If, at the time the sponsor contributes an 
obligation to a REMIC, the sponsor reasonably believes that the 
obligation is principally secured by an interest in real property within 
the meaning of paragraph (a)(1) of this section, then the obligation is 
deemed to be so secured for purposes of section 860G(a)(3). A sponsor 
cannot avail itself of this safe harbor with respect to an obligation if 
the sponsor actually knows or has reason to know that the obligation 
fails both of the tests set out in paragraph (a)(1) of this section.
    (ii) Basis for reasonable belief. For purposes of paragraph 
(a)(3)(i) of this section, a sponsor may base a reasonable belief 
concerning any obligation on--
    (A) Representations and warranties made by the originator of the 
obligation; or
    (B) Evidence indicating that the originator of the obligation 
typically made mortgage loans in accordance with an established set of 
parameters, and that any mortgage loan originated in accordance with 
those parameters would satisfy at least one of the tests set out in 
paragraph (a)(1) of this section.
    (iii) Later discovery that an obligation is not principally secured. 
If, despite the sponsor's reasonable belief concerning an obligation at 
the time it contributed the obligation to the REMIC, the REMIC later 
discovers that the obligation is not principally secured by an interest 
in real property, the obligation is a defective obligation and loses its 
status as a qualified mortgage 90 days after the date of discovery. See 
paragraph (f) of this section, relating to defective obligations.
    (4) Interests in real property; real property. The definition of 
``interests in real property'' set out in Sec.  1.856-3(c), and the 
definition of ``real property'' set out in Sec.  1.856-3(d), apply to 
define those terms for purposes of section 860G(a)(3) and paragraph (a) 
of this section.
    (5) Obligations secured by an interest in real property. Obligations 
secured by interests in real property include the following: mortgages, 
deeds of trust, and installment land contracts; mortgage pass-thru 
certificates guaranteed by GNMA, FNMA, FHLMC, or CMHC (Canada Mortgage 
and Housing Corporation); other investment trust interests

[[Page 116]]

that represent undivided beneficial ownership in a pool of obligations 
principally secured by interests in real property and related assets 
that would be considered to be permitted investments if the investment 
trust were a REMIC, and provided the investment trust is classified as a 
trust under Sec.  301.7701-4(c) of this chapter; and obligations secured 
by manufactured housing treated as single family residences under 
section 25(e)(10) (without regard to the treatment of the obligations or 
the properties under state law).
    (6) Obligations secured by other obligations; residual interests. 
Obligations (other than regular interests in a REMIC) that are secured 
by other obligations are not principally secured by interests in real 
property even if the underlying obligations are secured by interests in 
real property. Thus, for example, a collateralized mortgage obligation 
issued by an issuer that is not a REMIC is not an obligation principally 
secured by an interest in real property. A residual interest (as defined 
in section 860G(a)(2)) is not an obligation principally secured by an 
interest in real property.
    (7) Certain instruments that call for contingent payments are 
obligations. For purposes of section 860G(a)(3) and (4), the term 
``obligation'' includes any instrument that provides for total 
noncontingent principal payments that at least equal the instrument's 
issue price even if that instrument also provides for contingent 
payments. Thus, for example, an instrument that was issued for $100x and 
that provides for noncontingent principal payments of $100x, interest 
payments at a fixed rate, and contingent payments based on a percentage 
of the mortgagor's gross receipts, is an obligation.
    (8) Defeasance. If a REMIC releases its lien on real property that 
secures a qualified mortgage, that mortgage ceases to be a qualified 
mortgage on the date the lien is released unless--
    (i) The mortgagor pledges substitute collateral that consists solely 
of government securities (as defined in section 2(a)(16) of the 
Investment Company Act of 1940 as amended (15 U.S.C. 80a-1));
    (ii) The mortgage documents allow such a substitution;
    (iii) The lien is released to facilitate the disposition of the 
property or any other customary commercial transaction, and not as part 
of an arrangement to collateralize a REMIC offering with obligations 
that are not real estate mortgages; and
    (iv) The release is not within 2 years of the startup day.
    (9) Stripped bonds and coupons. The term ``qualified mortgage'' 
includes stripped bonds and stripped coupons (as defined in section 
1286(e) (2) and (3)) if the bonds (as defined in section 1286(e)(1)) 
from which such stripped bonds or stripped coupons arose would have been 
qualified mortgages.
    (b) Assumptions and modifications--(1) Significant modifications are 
treated as exchanges of obligations. If an obligation is significantly 
modified in a manner or under circumstances other than those described 
in paragraph (b)(3) of this section, then the modified obligation is 
treated as one that was newly issued in exchange for the unmodified 
obligation that it replaced. Consequently--
    (i) If such a significant modification occurs after the obligation 
has been contributed to the REMIC and the modified obligation is not a 
qualified replacement mortgage, the modified obligation will not be a 
qualified mortgage and the deemed disposition of the unmodified 
obligation will be a prohibited transaction under section 860F(a)(2); 
and
    (ii) If such a significant modification occurs before the obligation 
is contributed to the REMIC, the modified obligation will be viewed as 
having been originated on the date the modification occurs for purposes 
of the tests set out in paragraph (a)(1) of this section.
    (2) Significant modification defined. For purposes of paragraph 
(b)(1) of this section, a ``significant modification'' is any change in 
the terms of an obligation that would be treated as an exchange of 
obligations under section 1001 and the related regulations.
    (3) Exceptions. For purposes of paragraph (b)(1) of this section, 
the following changes in the terms of an obligation are not significant 
modifications regardless of whether they would be significant 
modifications under paragraph (b)(2) of this section--

[[Page 117]]

    (i) Changes in the terms of the obligation occasioned by default or 
a reasonably foreseeable default;
    (ii) Assumption of the obligation;
    (iii) Waiver of a due-on-sale clause or a due on encumbrance clause; 
and
    (iv) Conversion of an interest rate by a mortgagor pursuant to the 
terms of a convertible mortgage.
    (4) Modifications that are not significant modifications. If an 
obligation is modified and the modification is not a significant 
modification for purposes of paragraph (b)(1) of this section, then the 
modified obligation is not treated as one that was newly originated on 
the date of modification.
    (5) Assumption defined. For purposes of paragraph (b)(3) of this 
section, a mortgage has been assumed if--
    (i) The buyer of the mortgaged property acquires the property 
subject to the mortgage, without assuming any personal liability;
    (ii) The buyer becomes liable for the debt but the seller also 
remains liable; or
    (iii) The buyer becomes liable for the debt and the seller is 
released by the lender.
    (6) Pass-thru certificates. If a REMIC holds as a qualified mortgage 
a pass-thru certificate or other investment trust interest of the type 
described in paragraph (a)(5) of this section, the modification of a 
mortgage loan that backs the pass-thru certificate or other interest is 
not a modification of the pass-thru certificate or other interest unless 
the investment trust structure was created to avoid the prohibited 
transaction rules of section 860F(a).
    (c) Treatment of certain credit enhancement contracts--(1) In 
general. A credit enhancement contract (as defined in paragraph (c) (2) 
and (3) of this section) is not treated as a separate asset of the REMIC 
for purposes of the asset test set out in section 860D(a)(4) and Sec.  
1.860D-1(b)(3), but instead is treated as part of the mortgage or pool 
of mortgages to which it relates. Furthermore, any collateral supporting 
a credit enhancement contract is not treated as an asset of the REMIC 
solely because it supports the guarantee represented by that contract. 
See paragraph (g)(1)(ii) of this section for the treatment of payments 
made pursuant to credit enhancement contracts as payments received under 
a qualified mortgage.
    (2) Credit enhancement contracts. For purposes of this section, a 
credit enhancement contract is any arrangement whereby a person agrees 
to guarantee full or partial payment of the principal or interest 
payable on a qualified mortgage or on a pool of such mortgages, or full 
or partial payment on one or more classes of regular interests or on the 
class of residual interests, in the event of defaults or delinquencies 
on qualified mortgages, unanticipated losses or expenses incurred by the 
REMIC, or lower than expected returns on cash flow investments. Types of 
credit enhancement contracts may include, but are not limited to, pool 
insurance contracts, certificate guarantee insurance contracts, letters 
of credit, guarantees, or agreements whereby the REMIC sponsor, a 
mortgage servicer, or other third party agrees to make advances 
described in paragraph (c)(3) of this section.
    (3) Arrangements to make certain advances. The arrangements 
described in this paragraph (c)(3) are credit enhancement contracts 
regardless of whether, under the terms of the arrangement, the payor is 
obligated, or merely permitted, to advance funds to the REMIC.
    (i) Advances of delinquent principal and interest. An arrangement by 
a REMIC sponsor, mortgage servicer, or other third party to advance to 
the REMIC out of its own funds an amount to make up for delinquent 
payments on qualified mortgages is a credit enhancement contract.
    (ii) Advances of taxes, insurance payments, and expenses. An 
arrangement by a REMIC sponsor, mortgage servicer, or other third party 
to pay taxes and hazard insurance premiums on, or other expenses 
incurred to protect the REMIC's security interest in, property securing 
a qualified mortgage in the event that the mortgagor fails to pay such 
taxes, insurance premiums, or other expenses is a credit enhancement 
contract.
    (iii) Advances to ease REMIC administration. An agreement by a REMIC 
sponsor, mortgage servicer, or other third party to advance temporarily 
to a REMIC amounts payable on qualified

[[Page 118]]

mortgages before such amounts are actually due to level out the stream 
of cash flows to the REMIC or to provide for orderly administration of 
the REMIC is a credit enhancement contract. For example, if two 
mortgages in a pool have payment due dates on the twentieth of the 
month, and all the other mortgages have payment due dates on the first 
of each month, an agreement by the mortgage servicer to advance to the 
REMIC on the fifteenth of each month the payments not yet received on 
the two mortgages together with the amounts received on the other 
mortgages is a credit enhancement contract.
    (4) Deferred payment under a guarantee arrangement. A guarantee 
arrangement does not fail to qualify as a credit enhancement contract 
solely because the guarantor, in the event of a default on a qualified 
mortgage, has the option of immediately paying to the REMIC the full 
amount of mortgage principal due on acceleration of the defaulted 
mortgage, or paying principal and interest to the REMIC according to the 
original payment schedule for the defaulted mortgage, or according to 
some other deferred payment schedule. Any deferred payments are payments 
pursuant to a credit enhancement contract even if the mortgage is 
foreclosed upon and the guarantor, pursuant to subrogation rights set 
out in the guarantee arrangement, is entitled to receive immediately the 
proceeds of foreclosure.
    (d) Treatment of certain purchase agreements with respect to 
convertible mortgages--(1) In general. For purposes of sections 
860D(a)(4) and 860G(a)(3), a purchase agreement (as described in 
paragraph (d)(3) of this section) with respect to a convertible mortgage 
(as described in paragraph (d)(5) of this section) is treated as 
incidental to the convertible mortgage to which it relates. 
Consequently, the purchase agreement is part of the mortgage or pool of 
mortgages and is not a separate asset of the REMIC.
    (2) Treatment of amounts received under purchase agreements. For 
purposes of sections 860A through 860G and for purposes of determining 
the accrual of original issue discount and market discount under 
sections 1272(a)(6) and 1276, respectively, a payment under a purchase 
agreement described in paragraph (d)(3) of this section is treated as a 
prepayment in full of the mortgage to which it relates. Thus, for 
example, a payment under a purchase agreement with respect to a 
qualified mortgage is considered a payment received under a qualified 
mortgage within the meaning of section 860G(a)(6) and the transfer of 
the mortgage is not a disposition of the mortgage within the meaning of 
section 860F(a)(2)(A).
    (3) Purchase agreement. A purchase agreement is a contract between 
the holder of a convertible mortgage and a third party under which the 
holder agrees to sell and the third party agrees to buy the mortgage for 
an amount equal to its current principal balance plus accrued but unpaid 
interest if and when the mortgagor elects to convert the terms of the 
mortgage.
    (4) Default by the person obligated to purchase a convertible 
mortgage. If the person required to purchase a convertible mortgage 
defaults on its obligation to purchase the mortgage upon conversion, the 
REMIC may sell the mortgage in a market transaction and the proceeds of 
the sale will be treated as amounts paid pursuant to a purchase 
agreement.
    (5) Convertible mortgage. A convertible mortgage is a mortgage that 
gives the obligor the right at one or more times during the term of the 
mortgage to elect to convert from one interest rate to another. The new 
rate of interest must be determined pursuant to the terms of the 
instrument and must be intended to approximate a market rate of interest 
for newly originated mortgages at the time of the conversion.
    (e) Prepayment interest shortfalls. An agreement by a mortgage 
servicer or other third party to make payments to the REMIC to make up 
prepayment interest shortfalls is not treated as a separate asset of the 
REMIC and payments made pursuant to such an agreement are treated as 
payments on the qualified mortgages. With respect to any mortgage that 
prepays, the prepayment interest shortfall for the accrual period in 
which the mortgage

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prepays is an amount equal to the excess of the interest that would have 
accrued on the mortgage during that accrual period had it not prepaid, 
over the interest that accrued from the beginning of that accrual period 
up to the date of the prepayment.
    (f) Defective obligations--(1) Defective obligation defined. For 
purposes of sections 860G(a)(4)(B)(ii) and 860F(a)(2), a defective 
obligation is a mortgage subject to any of the following defects.
    (i) The mortgage is in default, or a default with respect to the 
mortgage is reasonably foreseeable.
    (ii) The mortgage was fraudulently procured by the mortgagor.
    (iii) The mortgage was not in fact principally secured by an 
interest in real property within the meaning of paragraph (a)(1) of this 
section.
    (iv) The mortgage does not conform to a customary representation or 
warranty given by the sponsor or prior owner of the mortgage regarding 
the characteristics of the mortgage, or the characteristics of the pool 
of mortgages of which the mortgage is a part. A representation that 
payments on a qualified mortgage will be received at a rate no less than 
a specified minimum or no greater than a specified maximum is not 
customary for this purpose.
    (2) Effect of discovery of defect. If a REMIC discovers that an 
obligation is a defective obligation, and if the defect is one that, had 
it been discovered before the startup day, would have prevented the 
obligation from being a qualified mortgage, then, unless the REMIC 
either causes the defect to be cured or disposes of the defective 
obligation within 90 days of discovering the defect, the obligation 
ceases to be a qualified mortgage at the end of that 90 day period. Even 
if the defect is not cured, the defective obligation is, nevertheless, a 
qualified mortgage from the startup day through the end of the 90 day 
period. Moreover, even if the REMIC holds the defective obligation 
beyond the 90 day period, the REMIC may, nevertheless, exchange the 
defective obligation for a qualified replacement mortgage so long as the 
requirements of section 860G(a)(4)(B) are satisfied. If the defect is 
one that does not affect the status of an obligation as a qualified 
mortgage, then the obligation is always a qualified mortgage regardless 
of whether the defect is or can be cured. For example, if a sponsor 
represented that all mortgages transferred to a REMIC had a 10 percent 
interest rate, but it was later discovered that one mortgage had a 9 
percent interest rate, the 9 percent mortgage is defective, but the 
defect does not affect the status of that obligation as a qualified 
mortgage.
    (g) Permitted investments--(1) Cash flow investment--(i) In general. 
For purposes of section 860G(a)(6) and this section, a cash flow 
investment is an investment of payments received on qualified mortgages 
for a temporary period between receipt of those payments and the 
regularly scheduled date for distribution of those payments to REMIC 
interest holders. Cash flow investments must be passive investments 
earning a return in the nature of interest.
    (ii) Payments received on qualified mortgages. For purposes of 
paragraph (g)(1) of this section, the term ``payments received on 
qualified mortgages'' includes--
    (A) Payments of interest and principal on qualified mortgages, 
including prepayments of principal and payments under credit enhancement 
contracts described in paragraph (c)(2) of this section;
    (B) Proceeds from the disposition of qualified mortgages;
    (C) Cash flows from foreclosure property and proceeds from the 
disposition of such property;
    (D) A payment by a sponsor or prior owner in lieu of the sponsor's 
or prior owner's repurchase of a defective obligation, as defined in 
paragraph (f) of this section, that was transferred to the REMIC in 
breach of a customary warranty; and
    (E) Prepayment penalties required to be paid under the terms of a 
qualified mortgage when the mortgagor prepays the obligation.
    (iii) Temporary period. For purposes of section 860G(a)(6) and this 
paragraph (g)(1), a temporary period generally is that period from the 
time a REMIC receives payments on qualified mortgages and permitted 
investments to the time the REMIC distributes the

[[Page 120]]

payments to interest holders. A temporary period may not exceed 13 
months. Thus, an investment held by a REMIC for more than 13 months is 
not a cash flow investment. In determining the length of time that a 
REMIC has held an investment that is part of a commingled fund or 
account, the REMIC may employ any reasonable method of accounting. For 
example, if a REMIC holds mortgage cash flows in a commingled account 
pending distribution, the first-in, first-out method of accounting is a 
reasonable method for determining whether all or part of the account 
satisfies the 13 month limitation.
    (2) Qualified reserve funds. The term qualified reserve fund means 
any reasonably required reserve to provide for full payment of expenses 
of the REMIC or amounts due on regular or residual interests in the 
event of defaults on qualified mortgages, prepayment interest shortfalls 
(as defined in paragraph (e) of this section), lower than expected 
returns on cash flow investments, or any other contingency that could be 
provided for under a credit enhancement contract (as defined in 
paragraph (c) (2) and (3) of this section).
    (3) Qualified reserve asset--(i) In general. The term ``qualified 
reserve asset'' means any intangible property (other than a REMIC 
residual interest) that is held both for investment and as part of a 
qualified reserve fund. An asset need not generate any income to be a 
qualified reserve asset.
    (ii) Reasonably required reserve--(A) In general. In determining 
whether the amount of a reserve is reasonable, it is appropriate to 
consider the credit quality of the qualified mortgages, the extent and 
nature of any guarantees relating to either the qualified mortgages or 
the regular and residual interests, the expected amount of expenses of 
the REMIC, and the expected availability of proceeds from qualified 
mortgages to pay the expenses. To the extent that a reserve exceeds a 
reasonably required amount, the amount of the reserve must be promptly 
and appropriately reduced. If at any time, however, the amount of the 
reserve fund is less than is reasonably required, the amount of the 
reserve fund may be increased by the addition of payments received on 
qualified mortgages or by contributions from holders of residual 
interests.
    (B) Presumption that a reserve is reasonably required. The amount of 
a reserve fund is presumed to be reasonable (and an excessive reserve is 
presumed to have been promptly and appropriately reduced) if it does not 
exceed--
    (1) The amount required by a nationally recognized independent 
rating agency as a condition of providing the rating for REMIC interests 
desired by the sponsor; or
    (2) The amount required by a third party insurer or guarantor, who 
does not own directly or indirectly (within the meaning of section 
267(c)) an interest in the REMIC (as defined in Sec.  1.860D-1(b)(1)), 
as a condition of providing credit enhancement.
    (C) Presumption may be rebutted. The presumption in paragraph 
(g)(3)(ii)(B) of this section may be rebutted if the amounts required by 
the rating agency or by the third party insurer are not commercially 
reasonable considering the factors described in paragraph (g)(3)(ii)(A) 
of this section.
    (h) Outside reserve funds. A reserve fund that is maintained to pay 
expenses of the REMIC, or to make payments to REMIC interest holders is 
an outside reserve fund and not an asset of the REMIC only if the 
REMIC's organizational documents clearly and expressly--
    (1) Provide that the reserve fund is an outside reserve fund and not 
an asset of the REMIC;
    (2) Identify the owner(s) of the reserve fund, either by name, or by 
description of the class (e.g., subordinated regular interest holders) 
whose membership comprises the owners of the fund; and
    (3) Provide that, for all Federal tax purposes, amounts transferred 
by the REMIC to the fund are treated as amounts distributed by the REMIC 
to the designated owner(s) or transferees of the designated owner(s).
    (i) Contractual rights coupled with regular interests in tiered 
arrangements--(1) In general. If a REMIC issues a regular interest to a 
trustee of an investment trust for the benefit of the trust certificate 
holders and the trustee also

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holds for the benefit of those certificate holders certain other 
contractual rights, those other rights are not treated as assets of the 
REMIC even if the investment trust and the REMIC were created 
contemporaneously pursuant to a single set of organizational documents. 
The organizational documents must, however, require that the trustee 
account for the contractual rights as property that the trustee holds 
separate and apart from the regular interest.
    (2) Example. The following example, which describes a tiered 
arrangement involving a pass-thru trust that is intended to qualify as a 
REMIC and a pass-thru trust that is intended to be classified as a trust 
under Sec.  301.7701-4(c) of this chapter, illustrates the provisions of 
paragraph (i)(1) of this section.

    Example. (i) A sponsor transferred a pool of mortgages to a trustee 
in exchange for two classes of certificates. The pool of mortgages has 
an aggregate principal balance of $100x. Each mortgage in the pool 
provides for interest payments based on the eleventh district cost of 
funds index (hereinafter COFI) plus a margin. The trust (hereinafter 
REMIC trust) issued a Class N bond, which the sponsor designates as a 
regular interest, that has a principal amount of $100x and that provides 
for interest payments at a rate equal to One-Year LIBOR plus 100 basis 
points, subject to a cap equal to the weighted average pool rate. The 
Class R interest, which the sponsor designated as the residual interest, 
entitles its holder to all funds left in the trust after the Class N 
bond has been retired. The Class R interest holder is not entitled to 
current distributions.
    (ii) On the same day, and under the same set of documents, the 
sponsor also created an investment trust. The sponsor contributed to the 
investment trust the Class N bond together with an interest rate cap 
contract. Under the interest rate cap contract, the issuer of the cap 
contract agrees to pay to the trustee for the benefit of the investment 
trust certificate holders the excess of One-Year LIBOR plus 100 basis 
points over the weighted average pool rate (COFI plus a margin) times 
the outstanding principal balance of the Class N bond in the event One-
Year LIBOR plus 100 basis points ever exceeds the weighted average pool 
rate. The trustee (the same institution that serves as REMIC trust 
trustee), in exchange for the contributed assets, gave the sponsor 
certificates representing undivided beneficial ownership interests in 
the Class N bond and the interest rate cap contract. The organizational 
documents require the trustee to account for the regular interest and 
the cap contract as discrete property rights.
    (iii) The separate existence of the REMIC trust and the investment 
trust are respected for all Federal income tax purposes. Thus, the 
interest rate cap contract is an asset beneficially owned by the several 
certificate holders and is not an asset of the REMIC trust. 
Consequently, each certificate holder must allocate its purchase price 
for the certificate between its undivided interest in the Class N bond 
and its undivided interest in the interest rate cap contract in 
accordance with the relative fair market values of those two property 
rights.

    (j) Clean-up call--(1) In general. For purposes of section 
860F(a)(5)(B), a clean-up call is the redemption of a class of regular 
interests when, by reason of prior payments with respect to those 
interests, the administrative costs associated with servicing that class 
outweigh the benefits of maintaining the class. Factors to consider in 
making this determination include--
    (i) The number of holders of that class of regular interests;
    (ii) The frequency of payments to holders of that class;
    (iii) The effect the redemption will have on the yield of that class 
of regular interests;
    (iv) The outstanding principal balance of that class; and
    (v) The percentage of the original principal balance of that class 
still outstanding.
    (2) Interest rate changes. The redemption of a class of regular 
interests undertaken to profit from a change in interest rates is not a 
clean-up call.
    (3) Safe harbor. Although the outstanding principal balance is only 
one factor to consider, the redemption of a class of regular interests 
with an outstanding principal balance of no more than 10 percent of its 
original principal balance is always a clean-up call.
    (k) Startup day. The term ``startup day'' means the day on which the 
REMIC issues all of its regular and residual interests. A sponsor may, 
however, contribute property to a REMIC in exchange for regular and 
residual interests over any period of 10 consecutive days and the REMIC 
may designate any one of those 10 days as its startup day. The day so 
designated is

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then the startup day, and all interests are treated as issued on that 
day.

[T.D. 8458, 57 FR 61309, Dec. 24, 1992; 58 FR 8098, Feb. 11, 1993]